China Telecom Corp, the larger of the country's two fixed-line operators, posted an 8 per cent drop in third-quarter profit from the previous quarter due to tough competition from mobile phone operators and higher operating expenses. Net profit, excluding one-off connection charges, fell to 5.23 billion yuan in the third quarter from 5.68 billion yuan in the second quarter. Revenue rose slightly to 42.76 billion yuan from 42.68 billion yuan, while net profit margin fell to 12.2 per cent from 13.3 per cent. The quarterly figures were derived by subtracting the first nine months' numbers from the half-year data the company reported yesterday. Last year's third-quarter results were unavailable for comparison. 'We know that the operating environment [of China's fixed-line phone market] is very tough,' said Paul Chan, an analyst at Tai Fook Research. 'China Telecom's [third-quarter] profit margin was lower than in the first half than our expectation because of higher operating expenses.' Seeking to offset the decline in its maturing fixed-line business, China Telecom is diversifying its revenue base into internet broadband business and value-added products such as ring tones and information services. China Telecom's broadband subscribers increased to 27.35 million in the third quarter, up 8.3 per cent from the 25.26 million in the previous quarter. The firm, which offers a limited mobile service known as Little Smart, is hoping to expand business by offering high-speed third-generation (3G) mobile services. The mainland government is widely expected to award licences to operate 3G services next year, and China Telecom and China Mobile, with their strong financial backgrounds, are likely recipients. 'The fixed-line operator and the market are pinning their hopes on the 3G business,' said Andy Lam, associate director of investment research at Harris Fraser (International). 'With a massive user base from its fixed-line and broadband services, developing 3G services will bring synergy and provide a new growth driver to China Telecom.' Shares of China Telecom closed 1 per cent lower yesterday at HK$2.86 before the third-quarter earnings were released, compared with the 0.7 per cent gain of the Hang Seng Index. The stock has gained just 0.35 per cent since the beginning of this year.